PERSPECTIVE3-5 min to read

Three key forces driving energy transition

15/11/2021
20211115_hk_eng_alex

Authors

Alexander Monk
Portfolio Manager, Global Resource Equities

Inflationary forces should not detract from the longer term opportunities in energy transition.

Energy transition equities remained under pressure during the third quarter this year, as some of the inflationary forces that are impacting global industry continue to weigh on the space. What started with higher raw material and logistics costs have moved to higher energy and labor costs. And we've also started to see significant supply chain disruption which has stopped companies getting the critical components they need to produce the goods they sell.

While we are concerned that these inflationary pressures will last for some time, potentially well into next year, they should not detract from the longer term view, which remains as robust and as exciting as it has ever been.

As outlined in the recently released IPCC Climate Assessment Report, the world still has a significant emissions problem and scientists are increasingly confident in saying that not only is our climate changing, but that humanity is one of the underlying causes. If left to continue on our current pathway, not only will global temperatures increase towards four degrees, we will also start to see some of those consequences in terms of increased extreme weather events that start to become very disruptive for economies and livelihoods around the world.

Three key forces driving energy transition

Depending on how you measure emissions, our energy system contributes to anywhere between 40% and 70% of all emissions globally. Fixing that part of our economy alongside our food and water system is absolutely crucial to meeting the net zero goals. The good news is that the technology supporting the energy transition are very much available and there are three key powerful forces that are pushing this transition forward, which are cost, consumer demand and policy support.

Firstly, from a cost perspective, technologies across the energy transition space are becoming increasingly cost competitive versus the alternative. Particularly as conventional energy process starts to rise. Not only are renewables becoming more and more competitive against conventional fuels but electric vehicles are becoming more widely available, and even green hydrogen is starting to look cost competitive as natural gas prices have increased.

Secondly, from a consumer demand perspective, not only are we seeing more interest in alternatives like residential solar and heat pumps, but also electric vehicle penetration has started to rise. While across the third quarter, penetration rates in China and Europe reached 15% and 20% respectively.

Thirdly, from a policy support perspective, we are very excited about the COP26 conference in Glasgow. This climate event is one of the more important events that we have had for for some time as governments from around the world meet to put in place firmly committed policies that help them reach their net zero goals in the form of nationally determined contribution plans.

Where are the investment opportunities in the electric vehicles ecosystem?

One of the areas in the energy transition space that really summarises these three driving forces - the scale of the change required and the opportunity ahead for companies and investors, is electric vehicles (EVs). Not only in terms of the vehicle rollout, but also the broader infrastructure that needs to happen behind it in terms of the charging infrastructure, but also making our grid more robust, resilient and flexible going forward. 

Not only does that create opportunities for companies involved in the charging infrastructure space, which will clearly benefit as we start using more EVs and demand more charging infrastructure, but also companies in the broader electrical equipment space, providing the critical sub-stations, transformers and software to help make the grid more robust and reinforce it as our electric vehicle usage increase.

We will also need a significant amount of energy storage too, which is very exciting in terms of its opportunity to inject additional power into the grid as we all start to charge our vehicles at different times.

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Authors

Alexander Monk
Portfolio Manager, Global Resource Equities

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